Today I’ll be taking a few minutes to introduce all of you to the ways that the socially responsible investor has been working towards the same goals that most of you have yourselves been working to achieve.
My field operates from the perspective that financial analysis drives behavior of management teams at publicly traded companies. When Wall Street talks management listens and generally acts. Further we believe that because of the sheer buying power of the financial services or asset management industry, roughly $660T globally vs. a global GDP of roughly $50T, any progress towards a green and pleasant (at best) and survivable (at worst case) future rests on the willingness of investors to accept these goals and to communicate this fact with corporate management.
Recall for yourselves some of the recent unsettling stories about the way that this world of global finance, allowed unfettered access to markets, has treated humankind. Would there have been a housing bubble had not a new buyer, the housing speculator, been fed the tools to bid up pricing? Some estimates of the speculative (as opposed to the real family moving in) buyer go as high as 20% nationally and 40% in some markets. You bet that causes prices to rise. The result is that hundreds of thousands of real people, real families with dreams, got hurt. And testimony before Congress this past month suggests that the same dynamic is taking place in oil and in other commodities. One hedge fund manager testified that in oil alone, removing this factor would be as big an impact as removing Chinese demand. The same is going on with regard to all our commodities, gold, nickel, food crops, and so forth are all being bid up.
Not all of this is speculative in purpose. The purpose may seem innocent enough. A mammoth pension plan feels it must replicate global risk/return opportunities and so buys the index. That is to say, buys the options to buy the crops, oil, commodities globally that fill the niche of that particular asset allocation. The unintended consequence is that a new and basically fake purchaser has entered the pricing structure. This purchaser cannot take delivery of the oil, but does bid up the price of the oil. On top of this, insurance and other derivatives are created to facilitate the new buyers. And the bubble keeps expanding.
Now finance owes you and me nothing. In fact, all fiduciary law over the past twenty-five years has focused attention on being certain that the fiduciary thinks of nothing but the portfolio’s growth. How shortsighted.
Growth in your retirement plan is good but can’t match the costs of higher health costs pollution created. Why have the money be at cross purposes with your own? There is a powerful engine racing somewhere, why have it run without destination?
Think about this. Cowboy shows were still popular when I was growing up. One scene was replayed in almost every episode. It had variations, but always the essential elements remained. Generally there was a vulnerable person or family, often a grandmother, mother, and three young children in a wagon or stagecoach being drawn by two or four strong horses. Something would cause the horses to stampede without purpose, which spelled disaster for the helpless family hugging each other in terror. Cowboy Bob would gallop up along side the lead horse and, in a magnificent display of heroic athletic ability, manage to either pull the beast to a more moderate pace or actually mount it and steer the wagon to safety.
I argue that today the financial engine of the world is engaged in a purposeless stampede, carrying the world’s population as we helplessly cling to whatever slim security we can grasp. We do not know at what place this ride will end but we know that the lack of purpose spells disaster for our helpless “family of man.” And where is Cowboy Bob? Is he in government? No, finance has brought governments to their knees, forcing them to sell their water systems, roads, and basic infrastructures to private owners. Is he in consumer power? No, consumers are still bamboozled into using tobacco, so I do not trust them with this job. Is he in benign management at multinational corporations? No, corporate management has come under the relentless pressure of finance to enhance shareholder returns. There is only one possible Cowboy Bob in this picture, an investor class that introduces purpose and direction to this powerful set of beasts. Without an investor class that is able to adroitly mount, or at least steer the thundering forces of finance, and thereby commerce, disaster is certain.
This then is the role of responsible investors. We must enter the powerful charge but bring simple logic to the process. This is why we track very closely concrete indications of corporate strides in integrating social and environmental criteria into their operations. We try to bring true cost accounting to the picture. A company that “makes a profit” by getting the government to agree with the position that it is just too costly to develop better ways to deal with effluence from its factories is not, in fact, “making money.” It is sucking money from the taxpayer who will suffer the higher health costs of the higher child lymphoma (for example) cases in the area. And I’m not even addressing the ache of losing a child in this analysis. Costs that result from pollution must be made apparent on every balance sheet and income statement, not shoved off to the victim alone.
At Domini Social Investments we have a research methodology that we think helps us to get at the essential relationship a corporation has with its stakeholders. Detail on our Global Investing Standards is at www.domini.com.
We look at each stakeholder that the company interacts with and we attempt to see if that stakeholder was well treated. As a for instance, a series of product safety recalls might suggest that a company’s management team is not focused on the essential partnership that they have with the stakeholder known as the customer.
From this point on, I’m going to be confining my remarks to the ways that my industry directly intersects your interests, but know that responsible investors do address the human impact as well as the environmental impact when we look at a company and make a decision to purchase.
With regard to environmental considerations, we feel that the ecosystems upon which we all depend provide benefits of incalculable worth — including clean air and water, minerals, timber, oil, and fertile land. These natural resources are often available to companies at little or no dollar cost. Still, the extraction of these resources quite frequently threatens the viability of other environmental riches that may not be of immediate benefit to the corporation, such as biodiversity. At Domini, we take the position that companies that fail to treat the planet’s environmental riches with due respect jeopardize our ecosystems. To assess this partnership we look at five major themes.
One. Renewable and alternative energy sources matter. Corporations that are substantial users, producers, or developers of resources, products, and technology that reduce the risks of climate change and increase the use of sustainable alternatives to carbon-based fuels are preferred. This standard also leads us to avoid many of the oil, coal, electric utility and automobile companies whose products contribute most heavily to climate change.
Two. Eco-efficiency and resource conservation, whether in energy or materials usage, is simply good business. These investments bring some of the clearest and most immediate benefits to both the financial and environmental bottom lines.
Three. Recycling, safer technologies, and lifecycle designs are good. Companies that use recycled materials in their manufacturing processes, that take back and recycle products, that have found nontoxic substitutes for toxic chemicals used in manufacturing processes, make perfect sense for us.
Four. Pollution control and abatement is a company’s obligation. Begin by assuring that no substantial harm is done by its current operations. This means cleaning wastewater before it is discharged and capturing volatile organic compounds before they escape. It means installing scrubbers to prevent particulates and sulfur dioxide from being released. It means preventing spills and leaks, and disposing of hazardous wastes appropriately.
Five. Long-term environmental sustainability needs to become part of the corporate ethic. A surprising number of corporations still deny or ignore the need to manage their long-term environmental risks appropriately. Some oil companies still deny the reality of climate change. Some forestry companies still destroy the rainforests of the world. Some manufacturers still build toxic chemicals into their products.
A handful of companies have had the foresight to think systematically about their environmental footprint. Interface, a carpeting firm, rethinks the fundamental environmental implications of its operations. Tesco Corp., a food retailer, acts as a pioneer for the markets for organic or Fair Trade foods. Herman Miller, a furniture manufacturer, rethinks the environmental implications of the basic manufacturing materials it uses.
Staples reduced greenhouse gas emissions intensity by 21% in FY 2006 and expanded computer/peripheral recycling 10-fold in a single year. By limiting speed its delivery truck could travel at, it improved fleet fuel economy by 15%.
Reckitt Benckiser’s best known brand is Lestoil. The company’s three-part approach to reducing its carbon footprint includes reducing the amount of energy used, replacing fossil fuel energy resources with combined heat and power energy systems, and offsetting greenhouse gas emissions by planting enough trees to meet that goal. As a part of this plan the company installed solar panel arrays on factories in Italy, South Korea, and India.
Canadian National Railway conserves fuel and reduces emissions, by equipping its trains with Smart Start devices that automatically shut down trains when they are not in use, reducing idle time and conserving fuel.
Procter & Gamble has reduced overall packaging per case by an average of 27% and reduced waste emissions into the air and water, from manufacturing plants by 65% since 1990.
Whole Foods purchases credits from wind farms in 2006 offset 100% of the electricity used in all their stores, facilities, bakehouses, distribution centers, regional offices and national headquarters. The company’s printed material is done on recycled paper using soy inks and solvent-free printing processes but only after a careful evaluation of the “right to exist” of every piece it prints.
The progress can be seen across industry groups and is being tracked increasingly by industry. Boston College’s Institute for Responsible Investment just released a study of the sustainability of U.S. homebuilders. It found that only six of thirteen of the largest publicly traded home builders have made explicit commitments to environmental and sustainability initiatives. The study captivated the press, resulting in almost 50 separate articles and indicating a keen public interest in knowing the “best of breed” in a given field.
Continuing with the housing theme, Japanese Sekisui House Ltd. builds and sells steel-frame and wooden houses. The company developed the ‘CO2-off’ home, which minimizes electricity usage through a combination of hydrogen based fuel cells, solar panels, light emitting diode usage, and advanced air conditioning system.
Large investors are getting into the act. The Institutional Investors Group on Climate Change is a forum for collaboration between pension funds and asset managers, whose members control roughly $7 trillion. Of their membership, those that are asset owners asked investment managers to exercise shareholder voting rights on climate change roughly 90% of the time. It is working. Corporate Register found that for the period September 2006 through December 2007, 335 of the Global Financial Times 500 companies produced CSR reports.
Disclosure is also increasingly mandated by government. The Swedish government announced in late 2007 that all 55 publicly traded companies in which it holds ownership must begin reporting by 2010 on the extensive set of social and environmental indicators covered by the Global Reporting Initiatives guidelines, which is quite a comprehensive set. In early 2008, the Chinese government announced that companies in which the state had ownership would be expected to report their CSR records. Argentina’s capital, Buenos Aires just passed legislation requiring large companies headquartered in that city to publish sustainability reports. And of course the Japanese government has long mandated complex reports to the Japanese people as to the costs and benefits they receive as a result of a companies environmental face. These reports are very detailed and often go on for 20 or more pages with Fuji Film presentation representing the Gold Standard.
One final story. Recently Costa Coffee, a coffee shop chain with over 1,000 outlets chose to convert its entire coffee supply to ‘sustainably grown’ beans sourced from farms certified by Rainforest Alliance. The company’s Marketing director said the switch had been agreed to because the company felt it was right and because customers wanted it. Recall that, in this story, the customer is also the citizen. We citizens want the world to survive. We recognize that we are living human beings with hopes and dreams for our grandchildren. Often when we are represented by fiduciaries, these fiduciaries fail to recognize that simple fact and satisfy themselves with the grossly simpler job of tending to our wallets. In doing so they fail us. I would call upon corporations to join with responsible investors in returning the concept of a future that is not measured in quarters but in generations to Wall Street.
We on Wall Street can assist you in your work to get greener products, and some of us actually want to.